The Complete Guide to Investing In Short Term Trading How to Earn High Rates of Returns Safely

By Alan Northcott

Short-term trading refers to the practice of buying and selling financial instruments within the same trading week or, at most, a few weeks. Short-term traders buy and sell stocks over a few days or weeks in the hope that their stocks will continue climbing in value for the time they own them, making for quick and, often, huge profits. Some of the more commonly traded financial instruments are stocks, stock options, currencies, and futures contracts such as equity index futures, interest rate futures, and commodity futures.

Short-term trading was once the preserve of banks, financial firms, and professional investors. Many traders are bank or investment firms employees working in equity investment and fund management. As with many other business segments, the Internet, technology, and legislative changes have opened up this attractive marketplace to a new breed of individual investors and speculators working part-time. You and I can now stand on an even playing field with the largest banks, wealthiest individuals, and trading institutions from the comfort of home.

Short-term trading can provide you with very high and secure rate of return as high as 12%, 18%, 24%, or even 300%. If performed correctly, short-term trading can far outpace all other investment techniques. The key is to know how to perform this process correctly. This all sounds great, but what is the catch? There really is none, except you must know what you are doing! This groundbreaking and exhaustively researched new book will provide everything you need to know to get you started generating high-investment returns with low risk from start to finish.

In this easy to read and comprehensive new book you will learn how to set up your online account, how to choose the correct software to use in trading, how to get started in short-term trading, how to invest in short-term stocks, evaluate performance, and handle fees and taxes. This book delves into trading tactics for swing trading, position trading, leveraging the stock market, selling short, and pinpointing entry, exits, and targets for your trades.

You will pick up the language of a trader so that you recognize candlestick patterns, advancing and declining issues and volume, call options, and put options. You will know how to find the very best stocks every day, how to read and prosper with stock charts, how to use the New York Stock Exchange tick indicator and trading index (TRIN), the Commodity Channel Index (CCI), the moving average convergence/divergence (MACD), the Dow 30-Day Moving Average. As you read this book, the mysteries of short-term trading will unfold so that you can double or even triple your investment all while avoiding the common traps and pitfalls. In addition, we took the extra effort and spent an unprecedented amount of time researching, interviewing, e-mailing, and communicating with hundreds of today s most successful investors.

Aside from learning the basics of mutual fund trading you will be privy to their secrets and proven successful ideas. Instruction is great, but advice from experts is even better, and the experts chronicled in this book are earning millions. If you are interested in learning essentially everything there is to know about short-term investing as well as hundreds of hints, tricks, and tips on how to earn enormous profits in short-term investing while controlling your investments, then this book is for you.

• Language: English
• Publisher: Atlantic Publishing Group, Inc.
• Release date: Jan 12, 2007
• ISBN: 9781601381804

Alan Northcott

Alan Northcott is a successful financial author and trading educator, having been writing in the sector for some years. He has ten conventionally published books which were completed with Atlantic Publishing, and more recently has self published four more. These are in the "Newbies' Guide to Finance" series, and they fill a perceived need for straightforward introductions to various aspects of finance. All books are available in print and Kindle editions. In addition to the books published under his name, Northcott has ghostwritten several other books and regularly contributes articles and other writing for a variety of print and online clients.

Book preview

Burrell

Northcott

By Alan Northcott

With foreword by Stuart McPhee,

Trading Coach from www.trading-plan.com

N

The CompleTe Guide To

invesTinG in

shorT-Term

TradinG

how To earn hiGh raTes

of reTurns safely

The CompleTe Guide To invesTinG in shorT-Term

TradinG: how To earn hiGh raTes of reTurns safely Copyright © 2007 by Atlantic Publishing Group, Inc.

1405 SW 6th Ave. • Ocala, Florida 34471 • 800-814-1132 • 352-622-1875 Fax Web site: www.atlantic-pub.com • E-mail: [e-mail] SAN Number: 268-1250

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without the prior written permission of the Publisher. Requests to the Publisher for permission should be sent to Atlantic Publishing Group, Inc., 1405 SW 6th Ave., Ocala, Florida 34471.

ISBN-13: 978-1-60138-002-9

ISBN-10: 1-60138-002-X

Library of Congress Cataloging-in-Publication Data Northcott, Alan, 1951-The complete guide to investing in short-term trading : how to earn high rates of return safely

/ by Alan Northcott.

p. cm.

Includes bibliographical references and index.

ISBN-13: 978-1-60138-002-9 (alk. paper)

ISBN-10: 1-60138-002-X (alk. paper)

1. Speculation. 2. Rate of return. 3. Stocks. 4. Stock price forecasting. I. Title.

HG6041.N67 2008

332.64’5--dc22

2007052999

LIMIT OF LIABILITY/DISCLAIMER OF WARRANTY: The publisher and the author make no representations or warranties with respect to the accuracy or completeness of the contents of this work and specifically disclaim all warranties, including without limitation warranties of fitness for a particular purpose. No warranty may be created or extended by sales or promotional materials. The advice and strategies contained herein may not be suitable for every situation. This work is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional services. If professional assistance is required, the services of a competent professional should be sought. Neither the publisher nor the author shall be liable for damages arising herefrom. The fact that an organization or Web site is referred to in this work as a citation and/or a potential source of further information does not mean that the author or the publisher endorses the information the organization or Web site may provide or recommendations it may make. Further, readers should be aware that Internet Web sites listed in this work may have changed or disappeared between when this work was written and when it is read.

INTERIOR DESIGN: Vickie Taylor • [e-mail] PROOFREADER: Cathy Bernardy • [e-mail] Printed in the United States

Printed on Recycled Paper

We recently lost our beloved pet Bear, who was not only our best and dearest friend but also the Vice President of Sunshine here at Atlantic Publishing. He did not receive a salary but worked tirelessly 24 hours a day to please his parents. Bear was a rescue dog that turned around and showered me, my wife Sherri, his grandparents Jean, Bob, and Nancy and every person and animal he met (maybe not rabbits) with friendship and love. He made many people smile every day.

We wanted you to know that a portion of the profits of this book will be donated to The Humane Society of the United States.

— Douglas & Sherri Brown

The human-animal bond is as old as human history. We cherish our animal companions for their unconditional affection and acceptance. We feel a thrill when we glimpse wild creatures in their natural habitat or in our own backyard.

Unfortunately, the human-animal bond has at times been weakened.

Humans have exploited some animal species to the point of extinction.

The Humane Society of the United States makes a difference in the lives of animals here at home and worldwide. The HSUS is dedicated to creating a world where our relationship with animals is guided by compassion.

We seek a truly humane society in which animals are respected for their intrinsic value, and where the human-animal bond is strong.

Want to help animals? We have plenty of suggestions. Adopt a pet from a local shelter, or join The Humane Society and be a part of our work to help companion animals and wildlife. You will be funding our educational, legislative, investigative, and outreach projects in the United States and across the globe.

Or perhaps you'd like to make a memorial donation in honor of a pet, friend or relative? You can through our Kindred Spirits program. If you'd like to contribute in a more structured way, our Planned Giving Office has suggestions about estate planning, annuities, and even gifts of stock that avoid capital gains taxes.

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So you see, it's easy to help animals. And The HSUS is here to help.

The Humane Society of the United States

2100 L Street NW

Washington, DC 20037

202-452-1100

www.hsus.org

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Table of ConTenTs

Foreword........................................................ 15

INTrodUCTIoN.................................................. 19

ChapTer.1:.The.FIre.&.The.BoTToM.LINe........ 25

Emotion Rules ......................................................... 25

The Two Monsters .................................................... 26

Greed ...................................................................... 26

Fear ......................................................................... 27

The Other Emotions ................................................. 28

Global Influence....................................................... 29

Supply and Demand ................................................ 29

Skills of the Trade .................................................... 31

Being Wrong — Get Used To It! ................................ 32

Using Your Brain — Both Sides ............................... 34

Left Brain ................................................................ 35

The CompleTe Guide To invesTinG in shorT-Term TradinG

Right Brain .............................................................. 36

We Are Not Talking Sports Here ............................... 38

Success Bullets ....................................................... 39

Words to Know ........................................................ 41

ChapTer.2:.who.CoNTroLs.IT.aLL?................. 43

The Broad Markets .................................................. 43

Stock Markets.......................................................... 44

Bond Markets .......................................................... 44

Futures Market ........................................................ 45

Options Market ........................................................ 46

Forex Markets .......................................................... 49

Commodity Markets ................................................. 49

The Tree of Greed and Fear ...................................... 50

Evolution Happens to All Creatures ......................... 51

The Stock Exchanges ............................................... 51

The New York Stock Exchange (NYSE) ..................... 51

The NASDAQ ........................................................... 52

The American Stock Exchange (Amex) ...................... 54

Other Exchanges ..................................................... 55

Who Shines the Spotlight? ....................................... 55

Exchange-traded Funds ........................................... 57

ConTenTs

Success Bullets ....................................................... 57

Words to Know ........................................................ 58

ChapTer.3:.hoLd.oNTo.YoUr.MoNeY............. 59

Meet the Traders ...................................................... 59

The Day Trader ........................................................ 60

The Institutional Day Traders .................................. 61

The Retail Day Traders ............................................ 62

The Swing Trader ..................................................... 62

The Position Trader .................................................. 64

Market Pricing ......................................................... 65

Analyze This ............................................................ 66

Fundamental Analysis ............................................. 66

Technical Analysis ................................................... 67

Success Bullets ....................................................... 68

Words to Know ........................................................ 69

ChapTer.4:.pLaCe.YoUr.orders.pLease........ 71

Market Order ........................................................... 72

Limit Order .............................................................. 73

Stop Order ............................................................... 74

Stop-Limit Order ...................................................... 76

The CompleTe Guide To invesTinG in shorT-Term TradinG

Trailing Stop Order .................................................. 76

Day Orders .............................................................. 77

Good-‘Til-Canceled Orders ....................................... 77

Contingent Orders ................................................... 77

All-Or-None Orders .................................................. 78

Fill-Or-Kill Orders .................................................... 78

Selling Short ............................................................ 78

Meet the Brokers ..................................................... 81

Full-Service Brokers ................................................ 81

Discount Brokers ..................................................... 82

Direct-Access Brokers .............................................. 83

Proprietary Trading Firms ........................................ 85

Futures Brokers ...................................................... 85

Trading on Margin ................................................... 85

Success Bullets ....................................................... 86

Words to Know ........................................................ 87

ChapTer.5:.Make.IT.YoUr.BUsINess............... 89

Goals ....................................................................... 89

What Kind of Trader Are You? .................................. 91

The part-time trader ................................................ 91

The full-time trader .................................................. 92

ConTenTs

Hardware ................................................................. 92

Software .................................................................. 96

Trading tools include ............................................... 105

Analysis tools include .............................................. 105

Account management tools include: ......................... 105

Your Trading Environment ....................................... 106

Browser-Based Trading ............................................ 106

Integrated Trading Platform ..................................... 107

Success Bullets ....................................................... 108

Words to Know ........................................................ 108

ChapTer.6:.how.wILL.YoU.Trade?.................. 109

The Trading Rule Book ............................................ 109

Margin Requirements ............................................... 110

Settling Trades......................................................... 111

Free Riding .............................................................. 111

Your Trading Account .............................................. 112

Success Bullets ....................................................... 114

Words to Know ........................................................ 115

ChapTer.7:.The.FUNdaMeNTaLs...................... 117

The Economy ........................................................... 119

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The CompleTe Guide To invesTinG in shorT-Term TradinG

Employment Situation ............................................. 119

Consumer Price Index (CPI) ...................................... 120

Gross Domestic Product (GDP) ................................. 121

Federal Open Market Committee (FOMC) ................. 121

The Market Sector ................................................... 121

The Companies ........................................................ 124

The Method to Avoid the Madness ............................ 127

The Analyst ............................................................. 128

Buy-side Analysts .................................................... 129

Sell-side Analysts..................................................... 129

Independent Analysts .............................................. 130

Success Bullets ....................................................... 131

Words to Know ........................................................ 132

ChapTer.8:.CaUghT.oN.The.TeChNICaLITIes...133

The Trading Day ...................................................... 135

Charting Basics ....................................................... 135

Line Charts .............................................................. 136

Bar Charts ............................................................... 137

The Candlestick Chart ............................................. 139

Interpreting Candlestick Patterns ............................. 141

Success Bullets ....................................................... 154

ConTenTs

11

Words to Know ........................................................ 156

ChapTer.9:.sUpporT.&.resIsTaNCe.—..

Is.ThIs.a.revoLUTIoN?..................................... 157

Support Line ............................................................ 160

Resistance Line ........................................................ 162

Channels ................................................................. 163

Fibonacci Retracements ........................................... 165

Success Bullets ....................................................... 167

Words to Know ........................................................ 168

ChapTer.10:.The.BasIC.INdICaTors................ 169

Patterns ................................................................... 169

Continuation Patterns.............................................. 173

Reversal Patterns ..................................................... 175

Volume .................................................................... 177

On-Balance Volume (OBV) ....................................... 179

Moving Average ........................................................ 180

Success Bullets ....................................................... 183

Words to Know ........................................................ 184

ChapTer.11:.soMe.BeLLs.&.whIsTLes............. 185

Other Types of Moving Average ................................ 185

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The CompleTe Guide To invesTinG in shorT-Term TradinG

Multiple Moving Averages......................................... 186

Moving Average Convergence/Divergence (MACD) .... 188

Bollinger Bands ....................................................... 190

Momentum .............................................................. 193

Relative Strength Indicator....................................... 195

Stochastic Oscillator ................................................ 197

Average Directional Movement Index (ADX) .............. 199

Success Bullets ....................................................... 200

Words to Know ........................................................ 201

ChapTer.12:.MaNagINg.The.swINg............... 203.

Your Trading Plan .................................................... 203

Choosing Your Stocks .............................................. 206

Getting Out.............................................................. 207

Trend-following Trading ........................................... 208

Countertrend Systems ............................................. 209

Breakout Trading ..................................................... 209

Trading Volatility ..................................................... 210

Trading Range-Bound .............................................. 212

Trading Pullbacks .................................................... 213

Stopping Out ........................................................... 213

Testing Your System ................................................ 217

ConTenTs

13

Trading Other Markets ............................................. 219

Futures ................................................................... 219

Options.................................................................... 220

Background ............................................................. 221

Option Types ........................................................... 221

Buying Options ........................................................ 223

Success Bullets ....................................................... 226

Words to Know ........................................................ 227

ChapTer.13:.have.a.NICe.daY.(TradINg)....... 229

Trading Tactics ........................................................ 235

Timing is Everything ................................................ 236

Success Bullets ....................................................... 237

Words to Know ........................................................ 238

ChapTer.14:.IF.YoU.have.Never..

Traded.BeFore................................................ 252

Making Your Entrance ............................................. 245

Managing the Ride ................................................... 247

Making Your Exit ..................................................... 248

Success Bullets ....................................................... 251

ChapTer.15:.IN.The.eNd.—.seLF.Care............ 253

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The CompleTe Guide To invesTinG in shorT-Term TradinG

The Importance of Your Mind-set ............................. 253

The Importance of Physical Care .............................. 255

The Importance of Spiritual Life ............................... 258

Success Bullets ....................................................... 260

sUMMarY.......................................................... 261

gLossarY.......................................................... 263

BIBLIographY.................................................. 275.

aUThor.dedICaTIoN.&.BIographY................ 277

INdex................................................................ 279

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foreword

By Stuart McPhee

Trading would have to be one of the best professions available when you consider its benefits. It allows you to work for yourself with relatively little start up capital, there are very few overhead expenses, and now more than ever, you can execute trades almost seamlessly from anywhere in the world. These are the obvious attractions to trading with the single biggest attraction and primary motivation for most being the potential to make lots of money.

However, the biggest problem facing new traders is that many think trading is easy money. "How hard could buying

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The CompleTe Guide To invesTinG in shorT-Term TradinG

and selling really be?" would be a common sentiment among newcomers. Unfortunately, trading is probably the hardest

‘easy money’ there is. Trading has relatively straightforward concepts that have stood the test of time, yet it is amazing how many people make a mess of it.

Like many endeavors in life, the actions required to trade well are often counter intuitive. If people are not aware of these issues, they often make all the same mistakes that so many people before them have made time and time again.

Alan Northcott has taken great steps towards identifying the many challenges that new traders face; therefore, The Complete Guide to Investing in Short Term Trading is an excellent resource and should sit proudly with your collection of trading books.

Furthermore, Northcott has tackled a wide variety of topics, and consequently, has provided you a thorough overview of the many facets of setting up a trading methodology that is going to work for you. The rare approach of including several interviews within the book is a wonderful idea and provides you a valuable insight into the minds of those who have come before you and worked through the usual challenges.

Having read more trading books than I care to remember, and having presented to thousands of traders around the world, I feel that this book will assist anyone who needs to lay the foundations for long term, consistent, and profitable trading. It will also serve as a useful read for more experienced traders who feel the need to be reminded of the trading principles that work.

ConTenTs

1

Stuart McPhee

Trading Coach

Melbourne, Australia

T: [phone]

W: http://www.trading-plan.com

Formally a full-time Australian Army officer, Stuart McPhee is now a private trader, author, and trading coach. His articles have been widely published and he is the proud author of Trading in a Nutshell, 2nd Edition.

Living in Melbourne, Australia, Stuart regularly travels throughout Southeast Asia to conduct trading courses and has presented at numerous trading expos in Australia, Singapore, Malaysia, Vietnam, China, and Thailand. Stuart can be contacted through his ‘Develop Your Trading Plan’

Web site at www.trading-plan.com.

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The CompleTe Guide To invesTinG in shorT-Term TradinG

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inTroduCTion

The stock market — what images do these words conjure in the average American’s mind? The majority of the public does not know what the stock market is all about. These people do not understand what makes it work. They look at the stock market numbers as if they are written in Latin.

They wonder what makes them go up and down so drastically and so suddenly. Many people may think of investing, and indeed this is one way you can take advantage of the stock market. The most common form of investment in the United States is that associated with 401K retirement plans, but those may offer a limited selection of choices in funds, which reflect only a small section of the economic markets.

Now you have decided to leave these people behind and enter the ranks of the trader. Welcome and hold on tight, because you are in for the ride of your life. What is the purpose of trading? Why not just invest? Investing is a thing that everyone should do, and, as you read on, you will discover that investing and trading are different. Trading is about maximizing profit potential. If you do it right, you can make more money — plain and simple.

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The CompleTe Guide To invesTinG in shorT-Term TradinG

When envisioning the stock market, screens and newspaper pages full of lists of numbers, Wall Street, and businessmen in suits who sit at their desks in the corporate office buildings calling their broker, come to mind. This is all accurate. However, it is only part of the picture.

Trading on the stock market is not just reserved for industry players anymore. A new playing field has emerged, and it has changed forever the way the stock market is used. It has opened up the stock market to every person who wishes to go for the ride, and the Internet is the new playing field.

Yes, of course, the Internet. Not only has it revolutionized self-employment and the home-based business opportunity, the Internet has also revolutionized shopping, gaming, and the ability of people to educate themselves on just about any topic you can imagine. It has also brought the world of the trader into homes around the world. It does not matter if you are in an office on the 20th floor or in your own living room wearing pajamas. If you have a computer, you can trade. The Internet has made it possible to hold accounts online; transfer money with the click of a mouse button; and make decisions as to whether you should buy those pink shoes you were admiring, the golf clubs you saw on eBay, or the Chow Down Dog Food stocks that have just bottomed out. Your mouse may be the most powerful tool in your home and in your life, making it possible to change your life drastically. You must learn not to be click-happy in the trading game, ensuring that impulse is left at the door.

inTroduCTion

21

One fundamental tenet you must know right from the beginning is that investment and short-term trading are not the same thing. If you are planning to buy stocks based on a company’s performance over the last decade and then park your money there, you have picked up the wrong book.

This book is about short-term trading — what it is, how it works, and what does not work. It is about learning the necessary skills to play with the big boys who still reside on Wall Street and about which character traits will help you and which ones will hinder you.

Short-term trading can easily be summed up as trading in the stock market over a short period of time. There are three main types of short-term trading that you will learn about in the following pages. These are:

• Day trading (aka momentum or action trading and including scalping)

• Swing trading

• Position trading (aka core or trend trading) Many short-term traders work during the day and do not hold positions overnight. However, there is another huge section that mainly trade end of day, and these may hold positions for days or even weeks. This is a common way of entering the business while still holding down a full-time job. These different styles of trading will be discussed in this book. Suffice it to say here that, if you want the excitement, short-term trading can be an on the edge of your seat, eyes on five indicators at once, finger poised over the mouse button, and eyes wide shut experience,

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The CompleTe Guide To invesTinG in shorT-Term TradinG

for which the best childhood preparation would have been honing your reactions with video games.

Every successful endeavor was once a goal. Goals are crucial to success, and this book is no different. The goal set when writing this book was to reach out to all those new and novice traders who might empty their bank accounts and even risk their homes and their way of life without the proper information on trading. The goal is also to bring you this information in a new and unique way. After all, there are many well-written books on short-term trading that you can, and maybe have, read. Most of them are written by experts, and they are full of the best information.

So what is different about this book? You will not just find one expert’s voice in this book; you will find many experts’

voices, all with valuable information to share with you. You will find that many chapters have Case Studies relating to the content in which you will be able to learn from the wisdom of one who has gone before you. These Case Studies are the real stories of some of the most successful traders in the business and ones who have been trading for years. They have seen success, and they have felt the sting of failure. They have had to develop their own systems, and they have had to learn strategies and techniques and discover their strengths and weaknesses to get to where they are today. They have contributed to this book so that you can learn from their mistakes and be inspired by their successes. You are sure to find that some of the stories resonate with you, and you will be able to identify with some of the people who are now successful. After all, people tend to be easily inspired by those who have gone before.

inTroduCTion

23

Knowing this, I wanted to bring to you a book that would in some way incorporate people who had come before. My words flow around their stories so that you can learn the ins and outs of the business through their experiences.

As you read, you will also learn valuable success strategies.

These tips are well known, taught by the major success coaches of the world, and are crucial to the success of any endeavor. These strategies involve the use of the conscious and subconscious mind